We wrote about Amazon Inc (NASDAQ: AMZN) yesterday and how its elevated price-to-earnings (PE) ratio is likely giving investors cause for concern, notwithstanding its recent rally. While it may be one of the better know stocks out there with a frothy PE number, there are plenty of well-known stocks at the other end of the range.
Remember, a low PE ratio suggests a stock is cheap in a good way. It can often signal an enticing opportunity, as it conveys to investors that the stock is priced modestly in relation to its earnings and is possible while at the same time offering a metric to help screen out stocks with inflated valuations driven by market hype.
When screening for stocks that fall into this category, two names from the same industry jumped out at us straightaway, American Airlines Group Inc (NASDAQ: AAL) and United Airlines Holding Inc (NASDAQ: UAL). Let’s jump into each of them and analyze the case for getting involved.
American Airlines
With a PE ratio of 7, America is trading at historically cheap levels right now, even after the rally its shares have posted. Since the start of the year, they’ve tacked on more than 45% and are back trading at 52-week highs. But even with this recent run, you’d be hard-pressed to call them overbought or overvalued. The stock spent much of the years before the pandemic with a PE ratio that ranged between 8-30, which is what we must compare the current print against, given America posted pandemic fuelled losses up to the end of last year. So on the face of it, American shares look quite attractive here.
The airline industry as a whole has been benefiting from record traffic numbers, which have sent trailing twelve-month revenue numbers up above even their pre-pandemic record highs. And with America also having returned to full profitability, investors haven’t been slow about getting involved. But for those of us on the sidelines also looking to gain some airline exposure, America’s PE ratio of 7 should give firm peace of mind that we haven’t missed the boat.
Technically, the stock is also attractive, with a run of higher highs and higher lows underpinning the multi-month rally. There’s an argument to be made that shares are approaching some key resistance around the $20 mark, in addition to the stock’s RSI print of 84 which suggests shares might be overbought in the near term. But given the longer-term fundamental picture feels so undervalued, any pullback from here is just opening up an even wider opportunity.
United Airlines
United shares have managed to outperform American since the start of the year, posting an impressive 47% return. And this is reflected in their PE ratio of 10, which has already moved up from the 7.5 it was after March’s earnings report. But all in all, it’s still impressively lower than the 17 it started the year with, coming after United also posted its first quarterly profit since March 2020.
And just like America, United is well positioned to capitalize on the industry’s better-than-expected passenger numbers. Sure, there have been some negative headlines due to delays and cancellations recently, but the July 4th weekend still saw airport traffic numbers smashed nationwide. Just like American, United Airlines is poised to continue to do well in this environment, and its PE ratio tells us it’s not too late to get involved.
United’s shares are also in a strong technical pattern and at their highest level in two years. If they can continue to push up toward the $60 mark, it’s easy to see them breaking out beyond that. Their RSI is also elevated, so some near-term cooling wouldn’t be out of the question, but any weakness from here only improves their PE ratio and strengthens the argument that they’re good value.
